Treasury Bonds: The Darkest Performance in Over 200 Years Reveals a New Paradigm

A compelling analysis published by analyst @biancoresearch (Jim Bianco) on X recently stirred the financial market, revealing an alarming fact about American Treasury Bonds. According to Bianco, the 10-year period ending last summer was the worst for bonds since 1803. This finding, based on charts dating back to 1793, suggests that Treasury Bonds have indeed been the worst investment in recent American history.

Jim Bianco emphasizes that, although past performance is notably poor, this analysis does not predict what the bonds will do next. However, the history raises fundamental questions about the perception of safety and profitability of assets traditionally considered 'risk-free' in a scenario of constant state intervention in financial markets. A crucial read for investors and those skeptical of the hegemony of centralized finance.

The Worst Historical Performance of American Treasury Bonds

Jim Bianco's research is based on historical data compiled by Ed McQuarrie from Santa Clara, which extends the return records of bonds back to 1793. For comparison, Bank of America's analysis of the same asset starts only in 1936. What this long-term perspective reveals is shocking: the last 10 years, up to last summer, represented the worst period for Treasury Bonds since 1803. This is a statement that deserves heightened attention from all market participants.

Therefore, as @gregrieben pointed out, whose post was cited by Bianco, the 10-year rolling returns on Treasuries are now at -2%, which he classified as the worst in 100 years. Bianco, however, deepens this observation, expanding the timeline to over two centuries. This historical context is vital, as it differentiates an unusual downturn from a truly anomalous performance in the trajectory of the U.S. debt market.

The Causes of a Lost Decade for Capital

But why was this decade so bad for Treasury Bonds? Jim Bianco explains that the main attraction of a bond is its yield. Ten years ago, long-term Treasuries were paying 2%. This yield, which should have been a floor, was eroded by the subsequent rise in interest rates, resulting in significant losses in bond prices and, consequently, negative returns. The scenario was further complicated by a series of events that shaped global monetary policy.

To put this in perspective, in 223 years of history, a negative 10-year return occurred in only 25 months. Impressively, 24 of those months are precisely the ones we are currently experiencing. The only other record was in December 1959, with a return of -0.08%. This demonstrates that the recent decade was not a "normal" bad decade, but rather an extraordinary period shaped by Quantitative Easing (QE) and zero interest rates.

Thus, the ultra-liberal monetary policy of the Federal Reserve, combined with the recent and rapid increase in interest rates, decisively contributed to this picture. The Fed's tightening cycle between 2022 and 2023 set a speed record, with 5 percentage points of increases. This rapid maneuver in the cost of money reverberated throughout the economy, heavily penalizing long-term bondholders. As a result, historically low yields were annihilated by the aggressive moves of central banks.

Bianco points out that yields generally anticipate future returns in almost exactly 10 years. Now, he notes, "we have a yield to watch again." This phrase suggests a paradigm shift, where interest rates return to play a more significant role in asset pricing, after years of distortions.

The Relationship Between Yield and Future Returns

There is a strong and proven relationship between the current yield of a bond and its future returns. The higher the yield at the time of purchase, the better the subsequent returns tend to be. This correlation is robust: the R-squared is 0.61 for data dating back to 1800, and rises to 0.85 since 1914. This indicates considerable predictability in the long term.

Ten years ago, an investor bought a bond with a yield of 2%. Today, that same bond offers a yield of 5.2%. Therefore, history suggests that this current yield of 5.2% could translate into approximately 5% per year over the next decade, very different from the -2% recently observed. Some more tactical investors are already signaling that the attractiveness of the asset significantly increases when the yield exceeds market interest rates by 1%, signaling a potential return of interest in these assets.

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